In response to yesterday’s "Remembering the Real Estate Debaucle of the 1990’s" John McLeod offered an enlightening response. He made a number of excellent points, but the one comment he made that particularly struck me was "Banks keep their risk down by reselling most of their mortgages into this market (Mortgage Backed Securities). This risk is then managed by housing Government Sponsored Enterprises (GSEs) including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBs). GSEs use some of the world€™s smartest economists and most sophisticated computer modeling software products to manage their risk, but I am not totally convinced that they do this well."
I couldn’t agree more- and I think the great vulnerabilities of these institutions lie in widespread lax standards and mortgage fraud.
